This article first appeared in the Winter-Spring .1978 issue of The Intercollegiate Review, 14 South Bryn Mawr Ave., Bryn Mawr, Penn. 19010, and is here reprinted by permission.
Dr. Pasour is Professor of Economics at North Carolina State University at Raleigh.
In recent years U.S. citizens have been encouraged to waste less and adopt a more austere life style. We have been chastised for our energy-intensive habits. We eat meat instead of cereals; we drive large cars, drive when we could walk, keep our homes warmer than needed, and engage in many other "wasteful" practices. More generally, U.S. citizens have been criticized for the use of luxury goods and for using a disproportionate amount of the world’s resources.
There is a great deal of concern about the ability of reserves of fossil fuel and other resources to support projected levels of population. Extrapolation of current trends in resource use in the Limits to Growth and other "Doomsday Models" lead to the specter of the world grinding to a halt within the next century or so as currently known resources are depleted. What should be our posture toward the use of energy in the production of agricultural and industrial commodities? What is the appropriate approach to take toward legislation mandating mileage standards for automobiles, mandating insulation standards for home and office buildings, banning the use of cereals for livestock feed, and so on?
Conventional wisdom holds that we should eliminate waste in the use of gasoline, electricity, and other resources. The concepts "need" and "waste," however, are far more complicated than the widespread use of these terms suggests. The philosophy of austerity rests on an insecure basis and leads to measures that are harmful and contradictory. This essay explores the meaning of "waste" and "need" and compares the effects of market and non-market rationing procedures.
Waste and Need
During the energy crisis following the OPEC oil embargo, individuals were encouraged to reduce waste in the use of food, energy, and other raw materials. The same pleas were heard again in the winter of 1976-77 during the fuel crisis. If individual citizens are to respond intelligently, they must be able to identify waste.
The concept "waste," however, has little or no objective content and appears to be closely related to the term "need." Furthermore, the concept of "need," is meaningless as a guide in determining one’s consumption pattern. It is impossible to define objectively the goods and services we "need." How much meat, housing, heating fuel or gasoline, for example, do we "need?" The concept "need" implies that, regardless of price, there is some minimum amount of meat, housing, heating fuel, or gasoline (or any other good or service) that is essential to our livelihood. We observe, however, that people reduce consumption when relative price rises for any good or service including gasoline, coffee, meat, and housing.
The amount "needed" of any good depends on the price of that good relative to the price of other goods. The "need" of Jones for coffee depends on his subjective valuation of coffee and coffee substitutes. It is an illusion of bureaucrats and consumerists that the U.S. Congress, the Federal Energy Administration, or Ralph Nader can determine our individual "needs." Even we as individuals can only determine our own needs in the sense that we decide how much we prefer at given prices. When the relative price of a good changes, however, our "needs" change in the sense that we prefer to purchase more or less of the good. There is no known example of any good where the quantity purchased remains the same when there is a large change in its price relative to the prices of other goods.
The concept "waste" implies that amounts of a product which exceed our "needs" level provide no additional satisfaction. If this were in fact the case, amounts of the product above this "needs" level could be removed at no loss of satisfaction to the consumer. When we investigate commonly cited examples of "waste," however, we find that the goods presumably wasted are, in fact, contributing to consumer welfare. If the goods alleged to be wasted were providing no satisfaction, coercion would not be required to reduce use.
The use of the family auto provides a good example of the point being made. It is frequently alleged that the typical motorist wastes gasoline by using his auto when it isn’t "needed." We observe that people drive their car when they could walk, ride a bicycle, or form a car pool. This fact that people use their car when alternatives are available doesn’t mean that the use of gasoline used in this way is "wasted."
There is no denying the fact that auto users could get by with much less use of the auto. The fact that motorists could reduce auto use however, does not imply that it is in their interest to do so. Each motorist will act in the way which is most beneficial to him given the costs and benefits of various alternatives as they are perceived by him. Consumers respond to relative transportation costs in deciding where to live, how to get to work, where to vacation, and the like.
We observe that motorists economize in numerous ways when costs of auto travel increase. As gasoline prices increase, for example, there is substitution in favor of smaller autos, more bicycling, more car pooling, shorter vacation trips, and so forth. The fact that less gasoline is used when price increases does not mean that the larger amount used at the lower price was "wasted." One might, to the contrary, argue that at a lower price larger numbers of consumers are able to benefit from a particular good or service, and therefore a lower price is an efficient means of effecting a widespread distribution of some item of value.
People economize in the use of scarce resources in responding to their own self-interests. This does not mean that all people respond to a change in prices in the same way. We expect individuals to make different accommodations to any change in relative prices reflecting their own unique situation and preferences.
The preceding discussion implies that there is no objective basis by which an outside observer can determine the amount of gasoline any particular motorist "needs." If "needs" cannot be objectively determined, decisions made to limit use through administrative controls must be arbitrary and capricious.
Relative Prices vs. Need
It has become fashionable in recent years to suggest that people in the U.S. and other highly developed countries should base their consumption not on relative prices but on "need." The problem as indicated above is that need and waste concepts apart from relative prices provide no operational criterion by which the consumer can make choices. What do we "need," for example, in the way of clothing, electricity, gasoline or food? It has been shown that a nutritious minimum cost diet can be formulated for people as is done for livestock. Such a diet would enable U.S. families simultaneously to have a more nutritious diet and to reduce food expenditures to less than one-half their current level! Is this the food budget we "need?" Can all food expenditures in excess of this minimum cost nutritious diet properly be considered waste? Few of us will agree to sacrifice all palatability considerations and rely solely on cost considerations in choosing our diet.
The same problem arises in the use of gasoline, electricity, and in fact, all goods and services. How does one decide what size car to drive, amount of electricity to use, temperature to set the home thermostat? We, as consumers, respond to changes in relative prices in deciding what to eat, where to live, how to travel to work, heat our homes, and so forth. Each of us would do virtually everything we do in some other way if changes in relative costs were sufficiently large.
Attempts to get people voluntarily to change consumption habits are unlikely to have much effect so long as relative prices remain unchanged. On the other hand, when relative prices change, no one has to encourage consumers to make adjustments in the mix of goods consumed—regardless of whether the good is coffee, beef, gasoline or heating oil. In recent years, as relative prices changed, we have observed pronounced changes in size of auto, in meat consumption, in coffee consumption, in use of electricity, and the like. Market price will effectively ration goods when prices are not held down by administrative decree. There is no known example of a shortage persisting over time where price was relied upon as the rationing mechanism.
Problems of Non-Market Allocation Methods
Few people who suggest that consumers should make choices related to food, gasoline and other products on the basis of some criterion other than price recognize the problems to be overcome when the market mechanism is abandoned or market signals are ignored. Price in a market economy provides signals to both consumers and producers. The market is a highly useful mechanism for determining and transmitting information between all persons in the market. If the market is not permitted to coordinate the decisions of consumers and producers, central direction must be used. However, there is no way for the central planner to obtain all the information which enters into any real world market transaction. Knowledge about no good or resource exists in concentrated form or in a single mind. The economic problem, as Hayek has long stressed, is to secure the best use of our resources utilizing the knowledge of all members of society for ends whose relative importance only these individuals know.
In the absence of market signals, the regulator faces severe information problems. When the market is abandoned, the planner has no way to determine the information necessary to coordinate supply and demand. Consider the problem of determining the "appropriate" temperature setting, for example, where energy use is to be restricted not by price but by restricting fuel use. The regulator must not only predict the amounts which will be used at various settings, but also the amount which will be produced at the price level which is arbitrarily held below the market-clearing level.
Mandatory allocation or rationing schemes cannot be based on individual preferences and must be arbitrary and capricious. "Need" has no objective content as a guide to allocation, and in the absence of price signals there is no way for the central planner to make an allocation which reflects the subjective considerations of all persons in the market.
Problems are also created for the individual consumer who unilaterally adopts austerity measures and does not respond to market signals. Attempts by a single individual to reduce consumption of food, energy, and other raw materials beyond the level dictated by relative prices will serve little or no useful purpose. If an individual, acting alone, reduces the level of consumption, the effect on total consumption will be negligible. For example, consider the effect of a decision by one "socially aware" person to reduce gasoline use. The effect on total gasoline usage will be negligible but the inconvenience to that individual can be quite large. If the individual is in business such a decision will increase costs and under competitive conditions will seriously decrease profits or bankrupt the entrepreneur attempting to "do good."
Appeals for Group Action
What are the possibilities for group action? If large numbers of consumers reduce consumption below the level dictated by relative prices, producers receive incorrect signals. Consider, for example, the effect of consumer boycotts of beef, coffee and other goods. A reduction in demand will decrease price, given the level of supply. The decrease in price resulting from the boycott is likely to reduce future supply and cause future prices to be higher than they would otherwise be. Unless the product is effectively monopolized, there is no way for group action by consumers to reduce the long run price of the product.
What do these comments imply about moral suasion as a method of rationing and reducing resource use? Pleas to reduce use may be effective for a limited period of time when the situation is deemed to be urgent by a large part of the population. The problems enumerated above which arise when market signals are ignored are not eliminated by moral suasion. Moral suasion is also subject to another set of problems.
First, there is the free rider problem common to all voluntary group activity. These activities confer benefits on people who cannot be made to pay for the benefits they receive. When the demand for gasoline is reduced by everyone except Jones, the price is decreased. Jones as a free rider will benefit through the lower price and use more gasoline. Moral suasion may be effective for a limited period of time but it cannot solve the free-rider problem associated with pleas to reduce gasoline use, lower thermostats, and otherwise reduce resource use below the level dictated by market prices.
Second, moral suasion to reduce resource use to one’s "needs" or to reduce "waste" is subject to all the problems associated with identifying "waste" and "need" discussed above. There is no objective basis upon which the "socially concerned" citizen can determine the proper level of energy use. Consider, for example, the natural gas shortage during the winter of 1976-77 and the pleas to reduce "waste" in home heating. Upon what basis can the "socially concerned" homeowner decide whether to heat his home to 68°F, 65°F, 60°F, 55°F (or even lower)?
Third, even if moral suasion is effective and all citizens fully comply with, say, a request that thermostats be set at 62°F, the impact will differ greatly from person-to-person. Such a policy as in the case of mandatory restrictions assumes that everyone has similar circumstances. In reality, people differ greatly in their preferences for heat and in their preferred tradeoffs between heat and other sources of expenditure including size of house. The differential impact of any restriction in use of any good or resource is greatly magnified if an attempt is made to indicate the appropriate amount to use, e.g., 10 gallons of gas per car per week or 1000 KWH of electricity per month. The circumstances of time and place vary greatly from person-to-person.
Conservation and Rationing
A great deal of effort has recently been devoted to reduce "waste" of natural resources. The effects of such efforts, however, may be inconsistent with other closely related goals. First, consider action to reduce waste of renewable resources. Environmentalists and consumerists have been active in promoting recycling of paper in recent years as a way of conserving trees and protecting forests. Moves to reduce "waste" by reducing the use of paper and other wood products will be counterproductive for people who desire large amounts of forests for their esthetic value since such action will reduce the number of trees being grown. Tree producers respond to economic incentives just as other producers do. Thus, the more wood products used, the more trees will be produced. The more trees produced, the more land required for tree production and the larger the forest acreage. People who like to see trees growing are working against their own self-interest when they discourage the use of forest products.
Another simplistic solution, bans on the use of cereals in feeding livestock or forced reductions in meat consumption, will likewise not accomplish the intended goal. Jean Mayer, the famed nutritionist, has suggested, for example, that America could release enough grain to feed 60 million people by reducing meat consumption by 10 percent. Measures to reduce grain fed to livestock or to reduce meat consumption, however, are unlikely to be effective in providing food to the world’s hungry people. The hamburger not eaten in the United States will not miraculously appear in the hands of a hungry person in another land.
How about the use of non‑renewable resources including oil, coal, and the like? It is in the owner’s interest at any point in time to exploit these resources in such a way as to maximize the wealth, or value of these resources. As nonrenewable resources are used, increasing scarcity will be reflected in two ways. First, the price will be bid up as the resources become progressively scarcer. When this happens consumers are induced to economize on the use of the resources. The market provides an effective system of rationing scarce resources both at a given time and over time.
When prices are arbitrarily held down by government as in the case of natural gas, a shortage is created or exacerbated. The natural gas crunch in January 1977 can be traced directly to current and past government price controls. These price controls have kept prices artificially low and have given incorrect signals to gas producers and consumers. Low consumer prices have encouraged the "wasteful" use of gas by discouraging the use of home insulation, alternative fuel sources, lower thermostat settings, and so on. Low producer prices, at the same time, have reduced the incentives of suppliers of natural gas and served to decrease production.
In addition to involving less government intervention and red tape, price rationing provides a far more predictable method of restricting energy resource use when contrasted with administrative decrees such as mandatory standards for home insulation and auto mileage. When price increases, people will economize in different ways depending upon their own subjective evaluations. If the price of home heating fuel increases, for example, some people will reduce the temperature in all rooms, some will apply more insulation, some will close off rooms, and so forth.
When mandatory conservation standards are imposed, on the other hand, there is little latitude left for individual ingenuity. Everyone is forced to meet the same standard even though people having different tastes and preferences would economize in different ways if left free to do so; or alternatively, individual ingenuity is now channeled to the circumvention of the mandatory standards rather than to the solution of the problem for which those standards were allegedly imposed.
There is no way mandatory standards can cater to the diversity of individual tastes or take into account the differences existing in literally millions of different circumstances. The fundamental inequity of treating people in unequal circumstances the same way is ignored. Why, for example, should the homeowner with children now away from home be forced to insulate his entire house though heating and using only half the house? In this and numerous other examples it is easy to see how the individual homeowner can make an accommodation much easier to higher prices than to mandatory standards which cannot reflect different tastes and circumstances.
As non-renewable resources are exhausted, increasing scarcity is reflected in a second way. As price is bid up, the development of substitute resources is encouraged. The cotton price support program instituted in the 1930′s, for example, encouraged the development of nylon and other substitutes none of which were predictable when cotton prices were increased. Similarly, increases in prices of fossil fuel will serve to increase the development of new energy sources. Higher fossil fuel prices serve both to make alternative fuel sources currently available more profitable and to encourage the development of energy sources not currently available.
Finally, the market minimizes conflicts when compared with non-market rationing methods. The market is based on voluntary exchange so that all parties gain when a market transaction takes place. There is little basis for concern or antagonism when everyone can purchase all of a product he desires at a specified price.
The situation is much different when rationing is performed by non-market methods. The creation of antagonism and conflict is inherent in non-market rationing procedures since more of a product is desired than is available at the price arbitrarily held below the market clearing level. In such a situation an individual can legitimately feel that he is in competition with other consumers for the product whose price is controlled. The equity problems endemic in non-market rationing procedures were discussed above.
Allegations of antisocial conduct frequently arise where nonmarket allocation procedures are used. Each person has a vested interest in reductions in consumption by other people when there is a shortage. Individuals consuming more than they "need" as perceived by the outside observer are alleged to be wasteful. Since "waste" is in the eye of the beholder, efforts to reduce waste must be authoritarian in nature. Such efforts must be based on the values as perceived by the state and not on the values of individual decision makers.
Nonmarket allocation procedures also give rise to will-of-the-wisp attempts to determine whether producers are holding back production and whether costs of production are excessive. There will always be a perceived conflict between producers and consumers when production is subject to price controls. Consider the action by the Secretary of the Interior in February 1977 to determine whether producers of natural gas were "holding back production." The allegation was made that producers might be acting against the "public interest" by holding back on production under the expectation that future prices might be higher. Thus, a producer who reduces the amount of natural gas available for immediate consumption is "holding back" and is thereby "anti-social," but a consumer who reduces immediate consumption practices "conservation" which is "socially desirable." If a producer were restricting production anticipating higher future prices, would such conduct be antisocial? If producers do not follow market signals, they have no way to make production decisions including how much to produce or when to produce.
There are only two ways to allocate goods and resources—the market and central direction. The market permits people to choose on the basis of relative prices. Since each party gains under voluntary exchange, conflicts are minimized. When economic goods are rationed by nonmarket methods, conflicts are inevitable. Since more is desired than is available at the controlled price, measures must be taken to reduce consumption. Austerity measures with pleas to eliminate "waste" and reduce consumption to the "needs" level are endemic in nonmarket allocation procedures. Mandatory "conservation" measures mean that consumers are made poorer by being forced to do without.
How then choices ought be made in a world of "finite resources?" Conflicts will be minimized when the rules of the game are such that the market is mainly relied upon to ration goods and the individual citizen bases his decisions on his preferences and on relative prices. Admonitions to satisfy essential needs, forego waste, and live in austerity are unlikely to have the effect of feeding the hungry or sheltering the homeless throughout the world.
Forced austerity works against people’s willingness to work. If people are prohibited from buying the goods they desire, they will work less and take more of their real income in the form of leisure.
What does this mean about the level of living for us as individuals? The attitude that consumers should not be prohibited from acquiring the "luxury" goods they desire does not mean that we as individuals should follow a pattern of conspicuous consumption. The question of what goods and services each of us consumes, is a matter which must be answered by each of us as individuals. One person cannot identify "waste" in consumption by another individual except by imposing his own standard of values. There is little question that many of us could benefit from a more austere life style. Yet, moves to impose life styles upon us are at variance with the tenets of a free society.
The Ongoing Cost of Liberty
The search for the maximization of human well-being is a continuing one. Like the search for food, it never ends. We eat today but we will hunger again tomorrow. The cost of liberty is an ongoing cost. It is never paid in full. We achieve some measure of liberty today but we must strive again tomorrow. Were a totally libertarian society to emerge today, we would have to strive for it again the next day.
ROBERT LEFEVRE, Lefevre’s Journal, Summer, 1978